Readers' comments

Merit of Mark-to-market depends on the type of asset in question, particularly its volatility. So, if 26week moving average is used rather than the spot value, I am all for it, but the way it stands now (ie. end-of-year spot price), I wouldn't touch it with a 10-foot stick.

Not to distract, but a pretty good paper has looked at the impact of M2M rules and found that they made little difference to all but a handful of the largest banks. That of course has nothing to do with real estate assessments, about which I know a lot. These are done by state law - typically 3 years* - and there are a handful of companies that use their algorithms to allocate values using available sale data. Cities will often do it themselves. I've spent time with a number of people who do this work and their work is pretty amazing when you understand how it's done. It's important to remember that an individual's value is likely to be off while the whole is likely to be nearly dead on.

You ask how to rein in this practice, the market decided that. The bubble popped and many in that industry lost thier job.

One has to differentiate between banks.

First, the fly-by-night mortgage companies opened and offered those sub-prime, or interest only, or other loans. (I got numerous offers in the mail.)

The big banks fueled it with collaterallization of the loans into securities. I believe the other banks made 2 mistakes.
One, buying those securitized securities, and two offering the same type of deal locally to compete with the fly-by-nighters for market share.

Getting back to my OP (original post), do a search for when FASB changed the rules on mark-to-market, and look at some stock charts of the beaten down bank stocks. Causation or correlation?

"Appraisers who didn't give the correct "value" were sidelined by the realtors."

Absolutely, HFG, and it was a major factor in blowing the bubble that doesn't get the attention it deserves. How do we keep at least some professionals involved honest ? I've suggested before in comments that a typical buyer will likely think a house price is reasonable if a bank will finance the purchase, so that an underwater mortgagee might find a cause of action in that reliance on the banker's superior knowledge and experience.

The county auditor raised the value of my home in 2003, and 2006 in excess of its actual value due to the housing boom. I did get those valuations knocked down when I challenged thier valuations, though not to what I felt was correct - a compromise. I did note in my replies that we were in a bubble and when it popped I would seek to have the valuations adjusted again.

Most people didn't challenged and many re-fi'ed at the higher valuations. Hence the problem with prime real estate loans today.

Last year they reduced my valuation by 10%, which put it near what I felt was fair, so I didn't challenge. Mind you that during the above period businesses were lowering the values of thier properties.

It finally came to a head when in 2007 the FBI swept in a majority of county offices and took boxes of data. No indictments yet, but the papers are pointing to which offices might be corrupt, and the county auditor is near the top.

To bad I can't put my asset off-balance sheet when I apply for a loan so I'd have less liabilities and could borrow more.

As to your "objective value", we hear of "regulatory capture" well...
there was also "appraisal capture". Appraisers who didn't give the correct "value" were sidelined by the realtors.

OneAegis,
If someone felt a house was worth $700k and took a loan to buy it, well that's just irrational behavior becoming rational behavior because I don't think they were forced to do so under a gun. Also they must have had $14,000 each year to pay thier ~2% property tax, or what ever the percentage is.

"You can't cheat an honest man" W.C. Fields

Buttonwood,
Can we get you to run a weekly blog entry for our bank failure guesses?
The "fill in the caption" blog entry after the SOTU was fun.

bamps-as a renter, i'm hoping the rate is more akin to per land area value... lest my fixed charge/interest is more akin to a car note than a mortgage... but shhh....so long as evaluations are objective based on the criteria my fixed rate should be safe....

Hedgefundguy, you know that the relation of the town's valuation of your house to the current market value is irrelevant. The Town Fathers just decide how much dough they want, and set the rate per $1000 to get it. Fairness requires that all the houses be valued according to the same set of criteria, but it doesn't matter at all if the assessments are one-tenth of or ten times the "fair market value". In fact, we have no reason whatever to trust in the "objective" judgment of assessors who have shown themselves to be dangerously susceptible to the state of confidence surrounding them.

Mark-to-market is based upon the silly notion that the market price is always right. That is utter nonsense and it always has been. Even if it were not, M2M would still be a pro-cyclical, systemic disaster by continually emphasizing the liquidation value of a going business. Allowing the solvency of financial firms to be determined by the extremes of market misbehavior was a major contributor to the near-collapse of the global financial system. Except in trading accounts, where the play of the market itself is all, M2M was a bad idea whose time ought never to have come. Can we finally root out the preposterous and dangerous EMH ? Financial markets go quite insane as a matter of course. They are efficient only at reflecting the beliefs of buyers and sellers, and the gap between belief and reality will always be with us.

William Black, "The Best Way to Rob a Bank Is to Own One"
on recent events:

WILLIAM BLACK: They were able to get Congress to extort FASB, which is the Accounting Standards Board, to change the rules, so that you no longer have to recognize losses on your bad loans, unless and until you actually sell them.

PAUL SOLMAN: Extort FASB? Why would it be extorting FASB?

WILLIAM BLACK: They said, you will change the rules, and you will change the rules such that banks no longer have to recognize their losses, or we will remove your authority over the accounting rules, which is the whole reason for existence for FASB, right? So, that's extortion in anybody's language.
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I believe the change in FASB rules occurred near last year's March bottom. Hmmm....